What is the FOB definition? Under what circumstances is the FOB definition suitable for the transportation of goods? What advantages does the FOB definition have compared to other methods?

FOB stands for Free on Board, also known as the “free on board price.” It is one of the commonly used trade terms in international trade. The following is a detailed introduction to FOB:

The Definition of FOB

FOB means that the seller fulfills the delivery obligation when the goods are loaded onto the vessel designated by the buyer at the specified port of shipment. From that moment on, the risk of loss of or damage to the goods is transferred to the buyer. The seller is responsible for handling the export customs clearance procedures for the goods, etc., while the buyer is responsible for chartering the vessel, booking the shipping space, paying the freight, and handling the import customs clearance procedures for the goods, etc.

According to the Incoterms, under the FOB term, the seller shall deliver the goods on board the vessel designated by the buyer at the specified port of shipment within the agreed date or period, in the manner customary at the port.

Circumstances Where FOB is Suitable for Goods Transportation

• When the buyer has a strong need for control over transportation: If the buyer has long-term cooperative logistics resources such as freight forwarders and shipping companies at the port of destination, in order to better arrange subsequent links such as transportation connection and goods transshipment, they will prefer to use the FOB term so that they can charter the vessel and book the shipping space by themselves and arrange the transportation according to their own logistics plan. For example, large multinational manufacturing enterprises that purchase components from abroad usually choose FOB and utilize their global logistics network to arrange the transportation.
• When the transportation distance is long and the risks can be easily divided: For transportation methods such as long-distance ocean shipping, the goods are in transit for a long time and the risks are relatively complex. The FOB term clearly states that the risk is transferred when the goods cross the ship’s rail at the port of shipment, which provides a clear division of risks between the buyer and the seller during the long-distance transportation process, making it convenient for both parties to control and manage the risks of the goods at different stages. For instance, when exporting a large quantity of textiles, toys, etc. from China to the United States and using the FOB term for ocean shipping, both parties can clearly define the risks.
• When the added value of the goods is relatively low: For some bulk commodities with relatively low added value, such as ores, coal, etc., the seller may not be willing to bear excessive transportation, insurance and other costs and risks. By using the FOB term, the seller only needs to deliver the goods to the vessel designated by the buyer at the port of shipment, and the subsequent transportation and other matters are the responsibility of the buyer. This can simplify the seller’s responsibilities and cost accounting.

Advantages of FOB Compared to Other Methods

• Clear division of responsibilities and risks: Compared with other trade terms, FOB clearly divides the responsibilities and risks between the buyer and the seller based on the goods crossing the ship’s rail at the port of shipment. This gives both parties a very clear understanding of their respective responsibilities and risks. Once a problem occurs during the transportation of the goods, it is easy to determine the responsible party, reducing the possibility of trade disputes. For example, compared with the CIF term, in CIF, the seller has to bear more risks and costs for transporting the goods to the port of destination, while in FOB, the seller’s responsibilities are relatively simple and clear.
• Clear cost for the seller: The seller only needs to be responsible for transporting the goods to the port of shipment and loading them onto the ship to fulfill the delivery obligation, without having to bear subsequent transportation, insurance and other costs. This makes the seller’s cost quotation and accounting relatively simple, facilitating cost control and profit margin determination, and having a certain advantage in price negotiation and other aspects. For example, in international garment trade, if the garment manufacturer uses FOB for quotation, it can clearly calculate its production cost and the costs before the port of shipment, and will not be affected by the uncertainty of subsequent transportation and other costs when making the quotation.
• High autonomy for the buyer: The buyer can choose a suitable shipping company, freight forwarder, etc. according to their own needs and arrangements, and can better control the transportation link to ensure that the goods are transported and delivered according to their own requirements. At the same time, the buyer can also flexibly adjust the transportation plan according to market conditions, etc. For example, when the market situation changes, the buyer can adjust the transportation time and route in a timely manner.